The forgotten piece of transitions

Presently, I am representing a dentist who bought a practice in Florida, USA, in a case brought against the seller. He paid US$1.6 million for the practice. As those readers who have studied how the allocations of the purchase price is generally made, the lion’s share is set down as consideration for the seller’s goodwill. In this case, the number was US$1.2 million.

As with a good number of buys, the buyer did not have any significant contact with the seller’s staff until the deal had been made. The seller was staying on for up to three years on a year-to-year provider agreement. The seller is a personable, dynamic individual who had a very close relationship with the practice’s patients. The buyer almost slipped unnoticed into the office environment.

However, within a short time, he began to notice areas that could use improvement. The buyer — now the owner — began implementing those changes. He also unknowingly inflamed the seller’s — now provider’s — wife by letting their daughter, who had been working part-time at the front desk, go.

Within a few weeks, unknown to the buyer/owner, the seller/provider and his wife — who was his designee to handle the outstanding collections — began to torpedo the buyer. Although the seller had expressed his intent to retire, he began to look for another office beyond the geographic limits of his restrictive covenant. More unfortunately, he began to tell patients of the practice that if they were dissatisfied with the new operation, they should consider patronizing another dentist in the area who was a personal friend.

Obviously, the seller was not meeting his obligations to assure that his goodwill was transferred to the buyer.

If this wasn’t bad enough, the seller had a staff of whom many had been with him more than 10 years. Understandably, the affection of the staff resided with the seller. As the staff saw the unhappiness of the seller and his wife, and as they heard him speak disparagingly of the practice, they began to act in a way that damaged the buyer’s opportunities.

We are just beginning to discover exactly what the staff was up to. But we know, for example, that they 'froze out' new employees brought in by the buyer. We also have reason to believe they were recommending that patients seek treatment elsewhere — specifically that dentist-friend in the area.

When the true situation began to dawn on the buyer, his attention was naturally fixed on the seller/provider and the wife. The staff issues were neither on the top of his agenda, nor did he have any policies in place that he could have fallen back on to deal with the recalcitrant holdovers.

Six months after the sale, as the extent of the sabotage became apparent, the buyer was forced to terminate the seller/provider. Even before that event, two key, long-term front desk staff had either resigned or been terminated. Not coincidentally, they surfaced shortly thereafter in the employ of the seller’s friend.

Shortly after the seller was terminated, there was an exodus of patients from the practice. The operation had been bleeding patients before that event, but the exodus was dramatic. We are exploring where those patients went, but we believe a major portion went to the seller’s friend. Not long thereafter, the seller hung out a new shingle in a nearby town — outside his restricted area — and it appears quite a few patients decided that the drive was not too far.

Since severing the relationship with the seller, the buyer has struggled to maintain patients. He has had to do so in the midst of an exodus of older staff, all of who left without having assisted replacements to get acquainted with the patients and systems. So, in addition to practicing dentistry, he has been overwhelmed with making firing and hiring decisions. Any staff continuity has been lost, at an incalculable loss to the operation. Our client is going to be working for at least a couple years to bring his office together as a cohesive operation.

Few transitions go this badly, but …

Ray Miller, founder of Professional Practice Sales in California, USA, has facilitated more than 1,000 buy/sell agreements. He looks at his job as one of a risk manager. As a consultant advising the seller, one of his goals is that when the deal is done, he need not be concerned that he’ll be getting an unhappy call from a former client. This ethical approach to the bringing about a transition serves his clients well — but, equally as important, it greatly benefits the buyer.

The transition company that put the deal together for my litigation client was more typical — the goal appeared to be to make the deal happen and take the fee.

I have reviewed a good number of typical buy/sell agreements in the last couple years. All have pretty much the same provisions, and insofar as they go, they accomplish what they set out to cover.

But none have any provision for the transition of the staff to the new buyer.

Provision in the buy/sell for staff transition

Most doctors have an outdated set of employment practices policies, or none at all. Although that in itself is cause for concern in today’s environment, the absence of human resources guidance can dramatically diminish the value of the exchange for the buyer of the practice.

Now, one might ask, why should the seller be concerned about that? The reason is so that when you pass on the practice, you really pass it on. No seller wants to receive a call from the buyer unhappy about the deal.

In speaking with doctors around the United States, I now ask those who bought a practice how successful they were at keeping the staff intact. Most agreed there was a 100 per cent turnover within 12 months. This is not good. Considering that it costs an average of US$30,000 to replace a staff member, the buyer of an average size office is losing US$120,000 in the first year of the practice. Add to that the loss of productivity and potential loss of patients, and the first year cost is substantial.

In buying a practice, you are buying not just the patients, the goodwill and the fixtures and equipment. You are ‘buying’ the staff and all the ongoing challenges that multiple personalities bring.

Assuring staff continuity after handover: due diligence

The time for the buyer to focus on the staff and its issues is well before the buy/sell agreement is inked. If you start with a letter of intent, your due diligence on staff issues must start that early.

When it is clear the monetary issues are coming together, it is time to address the staff transition. This should start with your request that the seller provide you a brief biography of each staff member. This bio should include a history of the person’s employment, job duties/responsibilities, income level, benefits and a description by the seller of the person, her personality, strengths, weaknesses and needs/desires. You should require the seller to make clear any counseling or disciplinary actions he or she had to take in the past.

You may, for example, learn that the seller has a very experienced, competent and effective office manager who handles a host of issues. This, at first glance, is a great benefit. But you may then learn that the office manager has expressed an interest in retiring in the next six months, or intends to be married or move away, or any other number of contingencies that will cause you to consider what you need to do. If you do not explore this with the seller, you certainly are unlikely to learn of the staff makeup in the standard transition process.

You should review each staff member’s personnel file. At the same time, you should request a copy of any employment practices policies/procedures in effect at the time.

All of this is particularly of importance if the seller has one or more associates working for him. You must obtain the associate agreements and review them in detail. Remember, associates are employees too — no matter how you wish to structure the tax issues — and their performance will and must be governed by the employment practices policies.

This may well be the time to request that the seller make modifications to the associate agreements, depending on the terms and whether they are compatible with your philosophy and direction.

Even though the usual buy/sell requires the seller to terminate all employees upon the deadline for transition, the employees have expectations about income and bonuses even when they know you, the buyer, will be rehiring them. You must understand three key policies when doing due diligence: (1) pay structure; (2) bonus structure; and (3) paid and unpaid time off.

Employment practices policies in the buy/sell

I strongly recommend that if you are a seller, and the buyer does not inquire on the staff issues I’ve addressed, you should volunteer the information. You want this changeover to happen smoothly, and by offering the information and the means for the buyer to integrate the staff more effectively, you will demonstrate good faith.

Both buyer and seller must agree, in the buy/sell agreement, that a comprehensive employment practices manual will be in place before the handoff — or will be introduced to the staff before and provided for by the seller even if finalized after the hand over.

Why is this? It is because we want the staff to know that the current boss is the one instituting the policy. We don’t want this new set of rules to be another thing the staff has to hear from the new boss. There will be plenty of things in the operational area to deal with.

There are companies that can provide policies and procedures. Our company, Vision HR Solutions, Inc., provides full human resources support, beginning with customized employment policies and continuing with year-round support. Others offer similar products and services.

Introducing the staff

The seller may not be interested in staying for any length of time to assist in the transition. Whether or not it is a clean break for the old boss and staff or a more gradual transition, it is critical that the seller and buyer gather the staff together for a complete introduction of them to the buyer, the buyer’s aspirations and expectations, and the seller’s introduction of the new policies and procedures.

People naturally are worried about themselves and their jobs in any transition. The group meeting will introduce everyone to one another, but the introduction of the policies — preferably accompanied by a handbook that each staff member can take with her — is crucial.

Knowing there is written guidance has been shown to make staff members much more confident of their positions. This is particularly true when they know they have a grievance process they can follow — and it must be documented. To only say that 'my door is always open' simply is not sufficient.

Remember, when you buy an existing staff, you are buying some people — particularly those who have been there more than a few years — who 'know' how things are supposed to be done. In the absence of strong guidance from the buyer and seller, these folks will fall back on what they know and how they have done things in the past. The friction caused by this reluctance to adopt changes I strongly suspect is the root cause of most of the first year turnover.

This means that the group meeting needs to be followed by a one-on-one with each staff member. This is certainly a 'get acquainted session — and like the group meeting, it must be off site and after hours. The staff member should, however, be paid for her time.

You will already have the seller’s bio and thus will have your predecessor’s perspective. You will, however, want to immediately develop your own impressions. This is the time when you discuss your policies on the three key provisions of pay, bonuses and time off. Be a good listener. Encourage the person to speak freely.

A great icebreaker is one we trial lawyers are taught to use when choosing juries. Most of you know that we get up in front of a group of people we have never met before and ask them some very personal and potentially disquieting questions. So how do we get past the real anxiety most jurors feel — anxiety that will stifle real responses?

Confession. We confess something. I often simply confess that I have picked a couple hundred juries in my years as a litigator, but that every time I get up in court for the first time in a case, I’m scared. When you, the new boss, are meeting with the individual staff members, it is a good idea to confess that you, too, are a bit fearful of being able to take on the practice. You expect she is concerned some about you. You want the meeting to start the process whereby you can work together for the benefit of the patients.

This first individual meeting may be enough to satisfy you that someone will not fit in with your philosophy long-term. It seldom is sufficient to satisfy you that they will. By focusing early on, however, you will be able to plan transitions in staff — not be blindsided by resignations for which you have not prepared.

This same process is doubly important when dealing with associates. That should be obvious, and needs no further explanation.

As a seller, the fact that your successor is taking the time to integrate staff in his or her philosophy should be comforting.

Whether the cost of the purchase of the employment practices support is borne by the seller, the buyer or both, it is a very small expense when considered against the purchase price itself — or the loss of a single valued employee because of miscommunication and dissatisfaction.

Contact info

Mr. Moore can be reached at HRSolutions@mckenziemgmt.com.

Attend Michael Moore’s live Webinar!

On 19 May at 7 pm (EST), Juris Dr Michael Moore will offer a one-hour webinar, Increase Net Revenue, Foster Employee Confidence: The Five Keys to Effective Employment Relations for the Dental Office, followed by a Q&A session with the online audience. Participants will learn about: legal concepts underlying employee claims; the practices that reduce turnover of good employees; reducing the risk of unemployment compensation and wrongful termination claims; and how to reduce anxiety in dealing with employee relations issues

Take advantage of this opportunity to earn a CE credit by logging onto www.DTStudyClub.com, Online Courses to register. Live attendees will have access to the archived presentation for 30 days. The fee is $95 (USD).